The Feds are starting to dig in at the biggest middle-man in the pharmaceutical game

Preet Bharara, U.S. Attorney for the Southern District of New York, is photographed after speaking at the Crain's Business Forum in Manhattan, New York
Thomson Reuters
The Feds are gunning for the biggest middle man in the American pharmaceutical game, Express Scripts, according to government filings published on Tuesday along with the company's earnings.

Express Scripts is the largest pharmacy benefit manager (PBM) in the country. It's used by insurers and employers to try and keep a lid on what they spend on pharmaceuticals. It also has its own internal mail-order pharmacy, and manages patient assistance programs for drug companies. All of that has made it an behemoth.

And all of that is what's worrying politicians Washington and other federal agents. Both the US Attorney's Office for the Southern District of New York and the Department of Justice and US Attorney's Office for the District of Massachusetts want to know more about the company's client payment plans, pricing structures, and its patient assistance programs.

These are all issues that have come up over the last year as drug price hikes have become part of our national conversation. Usually, however, that conversation centers around pharmaceutical firms, not the middle men that distribute the drugs.

On August 15, 2016, the Company received a civil investigative demand from the United States Attorney's Office for the Southern District of New York, requesting information regarding the Company's relationships with pharmaceutical manufacturers and prescription drug plan clients, and payments made to and from those entities. The Company intends to cooperate with the inquiry and is not able to predict with certainty the timing or outcome of this matter.

On September 12, 2016, the Company received a subpoena duces tecum from the Department of Justice and United States Attorney's Office for the District of Massachusetts requesting information regarding relationships between pharmaceutical manufacturers, independent 501(c)(3) charitable foundations providing cost-sharing assistance to federal health care program beneficiaries, and specialty pharmacies. The Company intends to cooperate with the inquiry and is not able to predict with certainty the timing or outcome of this matter.

Express Scripts is already being sued by one of its largest clients, Anthem Insurance, for unfair dealing in their contract. That's just one of a few suits in which clients or whistleblowers accuse Express Scripts of taking advantage of its power and the lack of price transparency in the industry.

This is a huge deal in Washington, and not just because of recent scandals with EpiPen and Martin Shkreli. Republicans in Congress have been causing a stink about Express Scripts and other PBMs because they believe their vertical integration is giving them too much power and killing competition. Democrats worry that PBMs could be part of the reason why drug prices are so high, which is part of what's threatening Obamacare.

With these two investigations, we can expect more clarity as to whether or not those concerns are valid.

We should also note, by the way, that while the number of prescriptions Express Scripts declined in the third quarter, but the company beat earnings anyway on profits. That should tell you something.